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Rapid GDP Growth—Best Antidote for Poverty

Rapid GDP growth is the best antidote for poverty. That is the big message that comes blaring out of the poverty data for 2009-10. Record GDP growth of 8.5% per year between 2004-05 and 2009-10 has reduced poverty at a record rate of 1.5 percentage points per year, double the 0.7 percentage points per year in the preceding 11 years.

There can be no better refutation of the leftist myth that fast growth has benefited only a small rich coterie while bypassing the poor.

Unfortunately, the good news has been drowned out by quasi-illiterate screams from politicians and sections of the media that the data has been fudged. The allegation is false. The data has not been fudged, and should be cause for celebration.

The government has adopted the Tendulkar Committee’s poverty line, which is close to the World Bank poverty line of $1.25 in purchasing power parity terms. Critics howl that the Indian poverty line is unrealistic, but the World Bank poverty line has been accepted in global comparisons for decades.

China’s official poverty line after its 1978 reforms was two-third of the World Bank poverty line. Nobody called it a fudge or said it was impossible to live on so little. China estimated that it reduced the number of poor people from 250 million in 1978 to 29 million in 2001, a reduction of 221 million over 21 years. This was widely lauded, and Indian leftists complained that India’s poverty reduction was glacial in comparison.

Not any more. Based on the Tendulkar line, India has reduced the number of poor by 52 million within five years. At this pace, India will in 21 years reduce the number of poor by 218 million, virtually matching China’s performance of 221 million.

Earlier, thanks to slower GDP growth, the absolute number of poor in India fell very little on a consistent basis. But once India’s GDP growth accelerated to 8% per year, matching China’s growth between 1978 and 2001, India reduced poverty as fast as China. Caveat: the poverty lines in India and China are not identical, so the comparison may not be exact. Still, the fact remains that fast growth in both countries has been poverty-reducing.

We can certainly criticise India (as Amartya Sen and Jean Dreze did recently) for achieving less in most social indicators than not just China but even south Asian neighbours like Bangladesh. Thanks to misdirected subsidies and a refusal to discipline corrupt, absentee staff, the Indian government has achieved less on the social side than Bangladesh, let alone China.

Record GDP growth has produced record revenues for the government to use in improving social sectors. Alas, it has funked all the fundamental reforms needed for improved service delivery, so increased outlays do not produce correspondingly better outcomes.

Indeed, economist Lant Pritchett calls India a flailing state. “In police, tax collection, education, health, power, water supply — in nearly every routine service — there is rampant absenteeism, indifference, incompetence and corruption. In many parts of India, in many sectors, the everyday actions of the field-level agents of the state — policemen, engineers, teachers, health workers — are increasingly beyond the control of the administration at the national or state level.”

Nevertheless, this should not divert attention from the big picture: record GDP growth in India has produced record poverty reduction, just as it did in China. This message has got totally lost in the debate over statistical fudging, for two reasons.

First, the Planning Commission last year gave the Supreme Court a poverty line estimate of roughly 32 a day. But the poverty data released last week placed the poverty line at 28.62 a day. Many politicians and journalists — including those of prestigious foreign newspapers — jumped to the false conclusion that the government had revised the poverty line downward. Reading this torrent of criticism from my current perch in the US, I too was misled into thinking that the poverty line had been revised downward, and repeated that error in my last Swaminomics column ( Poverty has truly fallen: it’s no statistical fudge, STOI, March 25, 2012).

But the Planning Commission has clarified that the estimate of 32 a day given to the Supreme Court referred to 2011, whereas the 29.62 a day referred to 2009-10. The difference relates entirely to inflation — there has been no downward revision of the poverty line.

However, the government has indeed made a separate downward revision — of the poverty headcount ratio. Last year, Abhijit Sen and Montek Singh Ahluwalia of the Planning Commission said the 2009-10 NSS survey showed 32% of the population falling below the poverty line. This led to widespread moans that poverty was not falling fast enough despite record growth.

Less than a year later, the Planning Commission now says that the poverty ratio was actually 29.8%, implying a poverty decline much sharper than provisionally estimated last year. The revision has converted a modest performance into a stellar one. If the Planning Commission had simply waited for the final data and not misled the public with its provisional estimate last year, the final data would have carried greater credibility, and the sceptical public would have been more willing to celebrate the performance as stellar.

This mood will pass. Let us wait for the next survey data, for 2011-12. That will surely show a substantial further decline in poverty. Then we can really celebrate, with full conviction and no barbs about fudging.